Innovation management and dynamic capability
John Bessant and Wendy Phillips
Introduction
Innovation matters. In terms of competitiveness, whether of firms, sectors or national economies, much depends on sustaining a pattern of continuous change in what is offered to the world and the ways in which that offering is created and delivered (product and process innovation).
But this challenge raises the question of whether or not innovation can be ‘managed’? Is it simply a random, risky but essentially stochastic process – or are there things which can be done in terms of the design and operation of organizations which render them better or worse at carrying through the innovation task. The answer here appears to be a cautious ‘yes’ – decades of research on the experience of different firms from a number of different methodological perspectives suggest a convergence around a ‘good practice’ model for innovation management. Whilst there is certainly no guarantee of success and allowance needs to be made for the task of adapting and configuring these practices to particular circumstances, there is a basic recipe book from which to work.
For example, in the area of product development, ‘success’ practices include developing close understanding of user needs, strategic portfolio management, early involvement of multiple functions, systematic risk management and review via some form of ‘stage-gate’ system, etc. In engineering terms this pattern of convergent experience-based guidelines for how the process could be managed represents a set of ‘design rules’ which can be used in dealing with the problem in a particular context. The same applies in the area of process innovation, where well-tried practices aimed at delivering a steady stream of continuous improvements can be embedded in the day-to-day operations of the business. ‘Kaizen’ methods of this kind form the corner stone of most quality management programmes and underpin much of the ‘lean’ philosophy.(Imai 1987; Womack and Jones 2005) ‘Business process re-engineering’ and its related approaches offer another set of recipes aimed at more radical changes in operating processes(Davenport 1992).
Individual firms work with these practices to develop their own particular ways of managing the different elements in the innovation process – and these firm-specific patterns of behaviour give rise to particular structures and procedures for dealing with the challenge. Nelson and Winter termed these ‘routines’ (describing a particular set of activities which are developed to deal with a particular organizational task) and they represent the ‘genes’ whose expression governs the way firms manage the innovation problem (Nelson and Winter 1982). Some are more successful than others and we see an emergent pattern of learning from and between firms. In this sense there is a building up of a learned capability to manage the process and deliver a continuing stream of product and process innovations.
These learned capabilities are very much firm-specific and are referred to byTeece (1990) as core competences, which involves the strategic management of the firm’s structures and routines and, knowledge and skills in a manner that is to the firm’s competitive advantage. The dynamic capabilities approach extends this concept to consider the organisation of these capabilities in response to changes in the external environment (Teece and Pisano, 1994). In some cases, a firm’s capabilities can go as far as to hinder its progress, acting as core rigidities (Leonard-Barton,1992), requiring the destruction of existing skills and competences(Hall and Andriani, 2002).
Innovation today involves dealing with an extended and rapidly advancing scientific frontier, fragmenting markets flung right across the globe, political uncertainties, regulatory instabilities – and a set of competitors who are increasingly coming from unexpected directions. Increasingly innovation management involves bringing together different people and the knowledge they carry through building and running effective internal and external networks. This chapter analyses the such innovation networks and the importance of developing new dynamic capabilities related to the management of these networks. In doing so, the focus is on the capability of managing innovation as opposed to innovation capability. In other words, the managerial actions of harnessing and driving innovation rather than the process of generating and combining knowledge.
Drawing on research on supply chains and networks and technological collaboration, we commence with an introduction to innovation networks. The We go on to consider some of the key challenges in building and developing dynamic capabilities to manage innovation, looking towards inter-organisational relationships; concepts such as open innovation, inter-firm learning and discontinuous innovation are presented. The chapter concludes by discussing the implications for the strategic management of supply.
No firm is an island ….
A key component is at the inter-organizational level where innovation outcomes are strongly associated with the ways in which relationships and behaviour within these relationships are managed. At its heart innovation is about knowledge – and in particular, combining a wide range of knowledge elements to create something new. These elements may involve science and technology, market needs, manufacturing capabilities, competitor behaviour, regulatory issues and a host of other contents – but unless they can all be woven together the innovation is not likely to succeed.
The game has become very much a multi-player one. As a result, the innovation process has become collective and combinatorial in character (Coombs and Metcalfe, 2000). As firms struggle to internally supply all the knowledge and skills required by present day technologies, the emphasis has shifted towards firms’ external relationships as a means of accessing and acquiring new capabilities; in order to remain competitive and in tune with technological advances, firms are now adopting a more collaborative approach. Through increased collaboration and co-operation with other firms, the firm is able to access a further range of capabilities and create a ‘pool of resources’ (Loasby, 1994).
The response has to be one of spreading the net wide and trying to pick up and make use of a wide set of knowledge signals – in other words, learning to manage innovation at the network level. It’s something which Roy Rothwell foresaw in his pioneering work on models of innovation with a gradual move away from thinking about (and organising) a linear science/technology push or demand pull process to one which saw increasing inter-activity – at first across the firm with cross-functional teams and other boundary-spanning activities and increasingly outside the firm in its links with others. His vision of the ‘fifth generation’ innovation is essentially the one in which we now need to operate – with rich and diverse network linkages accelerated and enabled by an intensive set of information and communication technologies. (Rothwell 1992)
Emphasis is placed on developing strong networks with close linkages – for example getting close to customer to understand their needs and evolve solutions with them to address their problems, or partnering with key suppliers to enhance the range of knowledge available to the firm in meeting its particular product and process innovation challenges.(Lamming 1993). Rich and pro-ly developed external and inter-organizational links have been a regularly reported feature in innovation success studies for at least fifty years(Carter and Williams 1957; Rothwell 1992). It is clear that some form of inter-organisational co-operation can contribute benefits to members under certain conditions; of particular interest here is work on supply chains and networks, innovation networks (Tidd 1997; Oliver and Blakeborough 1998)and industrial districts and clustering (Chaston 1995; Semlinger 1995; Schmitz 1997). For example, in the case of supply chains and networks there is extensive evidence to support the view that some form of co-operation represents a viable alternative to more traditional confrontational models - although the design and implementation of such co-operative arrangements remains fraught with difficulty (Macbeth 1989; Sako 1992; Lamming 1993).
It is also important to acknowledge the existence of both co-operation and competition within and between networks. It is often the co-presence of these two dimensions that supports the process of innovation. Studies have shown that different types of relationship can exist between competing firms that can be competitive as well as harmonious often resulting in complex co-operative arrangements (Teece, 2003; Easton and Araujo, 1992; Bengtsson and Kock, 1999).
Similarly there has been much discussion about the merits of technological collaboration, especially in the context of complex product systems development (Dodgson 1991; Hobday 1994; Marceau 1994). Complexity challenge has brought with it a blurring of the borders between public and private sectors and between company strategies and public policy (Rycroft and Kash, 1999). Innovation networks offer significant advantages, enabling the assembly of different knowledge sets and reducing the time and costs of development - but are again often difficult to implement (Tidd, 1997).
Studies of ‘collective efficiency’ have explored the phenomenon of clustering in a number of different contexts. (Piore and Sabel 1982; Humphrey and Schmitz 1996; Nadvi 1997; Porter 1997). From this work it is clear that the model is widespread - not just confined to parts of Italy, Spain and Germany but diffused around the world - and under certain conditions, extremely effective. For example, one town (Salkot) in Pakistan plays a dominant role in the world market for specialist surgical instruments made of stainless steel. From a core group of 300 small firms, supported by 1500 even smaller suppliers, 90% of production (1996) was exported and took a 20% share of the world market, second only to Germany. In another case the Sinos valley in Brazil contains around 500 small firm manufacturers of specialist high quality leather shoes. Between 1970 and 1990 their share of the world market rose from 0.3% to 12.5% and they now export some 70% of total production. In each case the gains are seen as resulting from close interdependence in a co-operative network.
The conditions under which effective networking takes place are less clearly identified, but it is becoming evident that simple factors such as proximity do not, of themselves, explain the complexities of networking. For example, Humphrey et. al.(2003) identify the importance of developing trust relations, whilst Schmitz (1995) and Best (1990) both stress the importance of facilitation by network brokers, impannatore or others (Best 1990; Nadvi and Schmitz 1994; Schmitz 1995; Humphrey and Schmitz 1996).
And inter-organizational innovation networks are more than just ways of assembling and deploying knowledge in a complex world. Systems theory suggests that networks also develop what are termed ‘emergent properties’. That is, they have the interesting potential that the whole can be greater than the sum of its parts. Being in an effective innovation network can deliver a wide range of benefits beyond the collective knowledge efficiency mentioned above. These include getting access to different and complementary knowledge sets, reducing risks by sharing them, accessing new markets and technologies and pooling complementary skills and assets.
For example participating in innovation networks can help firms bump into new ideas and creative combinations – even in mature businesses. It’s well known in studies of individual creativity that the process involves making associations - and sometimes the unexpected conjunction of different perspectives can lead to surprising results. And the same seems to be true at the organisational level; studies of networks indicate that getting together in such fashion can help open up new and productive territory. For instance, recent developments in the use of titanium components in Formula 1 engines have been significantly advanced by lessons learned about the moulding process from a company producing golf which was uncovered through discussions undertaken at a networking event.
Extending the repertoire
The problem with managing innovation is that it involves trying to hit a moving target. No sooner has a firm managed to put in place routines for dealing with its environment through product and process innovation than that environment shifts. A new technology rewrites the rules of the game, a new market with different dynamics emerges, a government shifts the regulatory framework or a competitor develops a different business model. The only way in which the firm can deal with this is to extend its repertoire of routines – modifying some which work well, letting go of others which are no longer appropriate and trying to create some new ones to deal with new challenges. In other words it’s a continuing learning process, building and developing the capability to manage innovation. In the following section we’ll look at some of the frontier challenges around which new and modified innovation capability is being developed at the inter-organizational level.
Frontier themes in inter-organizational innovation
(i)Open Innovation
Perhaps the biggest shift has been the widespread recognition that innovation in the 21st century has really become a multiplayer game. Successful innovating firms have long realised the importance of linkages and connections -- getting close to customers to understand their needs, working with suppliers to deliver innovative solutions, linking up with collaborators, research centres, even competitors to build and operate innovation systems. But in an era of global operations and high-speed technological infrastructures populated by people with highly mobile skills, building and managing networks and connections becomes the key requirement for innovation. It's not about knowledge creation so much as knowledge flows and the way in which this knowledge is integrated and combined. Teece (2007) discusses moves by firms towards more decentralised structures as a means of adapting to the more global dispersion of knowledge. Even major research and development players like GlaxoSmithKline are realising that they can't cover all the knowledge bases they need and instead are looking to build extensive links and relationships with players around the globe.
Procter & Gamble is a good example of a successful innovator which is radically changing its approach. It has grown through continually renewing its product offerings across a wide palette and spends around $3 billion a year on some 7000 researchers worldwide to help them do this. But a decline in growth and a weakening share price in 1999 led them to change their game from ‘research and develop’ to ‘connect and develop’, and they have set themselves the ambitious target of sourcing 50% of their innovations from outside the company. So far the move has paid off – they now get around 35% of their innovations through a rich network of external links and seem to be leveraging significant market success as a result. The Crest Spinbrush – a battery operated toothbrush which sells for around $5 has grown a huge presence (worth around $200m per year) – originated as a derivative of a rotating lollipop and was introduced by a small team of entrepreneurs who approached P&G. Their ideas plus P&G’s marketing and distribution strengths seem to have paid off handsomely.
At the same time they have been applying the ‘”connect and develop” philosophy to building rich internal networks across divisions and between different global centres. A stream of product successes include Crest Whitestrips – which brought together their expertise in normally disparate fields like film technology and bleach and linked it to their oral care experience – and Olay Daily Facials, moisturising and cleansing tissues which drew on separate knowledge fields like cleansing agents and tissue production.
What’s happening with P&G, GSK, 3M and many others is a recognition of the shift towards what has been termed ‘open innovation’. The idea – first put forward by Henry Chesbrough – is that even large-scale R&D in a closed system like an individual firm isn't going to be enough in the 21st century environment (Chesbrough 2003). Knowledge production is taking place at an exponential rate and the OECD countries spend nearly $1trillion on R&D in the public and private sector – a figure which is probably an under-estimate since it ignores the considerable amount of ‘research’ which is not captured in official statistics. How can any single organization keep up with – or even keep tabs on – such a sea of knowledge? And this is happening in widely distributed fashion - R&D is no longer the province of the advanced industrial nations like USA, Germany or Japan but is increasing most rapidly in the newly-growing economies like India and China (Bessant and Venables 2008). In this kind of context it becomes be impossible to pick up on every development and even smart firms are going to miss a trick or two.
R&D is no longer the province of a firm’s home nation, product development is shifting from a local, cross-functional process towards one of global collaboration, employing skilled teams from across the globe (Eppinger and Chitkara, 2006). Global Product Development (GPD) involves collaboration between a number of centralised functions located in the Headquarter country and additional operational teams dispersed throughout the world. Modes of GPD may vary according to the location and ownership of resources and may include the outsourcing of engineering teams in parallel with captive offshoring engineering facilities. The advantages of GPD include improved engineering efficiency achieved through the use of lower cost resources, access to technical expertise from across the globe and products designed for an international market. GPD has been employed across a wide range of industries, most markedly in the software industry, closely followed by the electronics and manufacturing industries, with organisations suchas Alcoa, General Electric, Siemens and Hewlett-Packard utlizing the skills of nations such as China, India, Thailand, Mexico, Russia and Japan.